Corruption and human development.

• Author: Akcay, Selcuk

Corruption, defined as the misuse of public power (office) for private benefit, is most likely to occur where public and private sectors meet. In other words, it occurs where public officials have a direct responsibility for the provision of a public service or application of specific regulations (Rose-Ackerman 1997: 31). Corruption tends to emerge when an organization or a public official has monopoly power over a good or service that generates rent, has the discretionary power to decide who will receive it, and is not accountable (Klitgaard 1988: 75).

Corruption's roots are grounded in a country's social and cultural history, political and economic development, bureaucratic traditions and policies. Tanzi (1998) argues that there are direct and indirect factors that promote corruption. Direct factors include regulations and authorizations, taxation, spending decisions, provision of goods and services at below market prices, and financing political parties. On the other hand, quality of bureaucracy, level of public sector wages, penalty systems, institutional controls, and transparency of rules, laws, and processes are the indirect factors that promote corruption.

Corruption is a symptom of deep institutional weaknesses and leads to inefficient economic, social, and political outcomes. It reduces economic growth, retards long-term foreign and domestic investments, enhances inflation, depreciates national currency, reduces expenditures for education and health, increases military expenditures, misallocates talent to rent-seeking activities, pushes firms underground, distorts markets and the allocation of resources, increases income inequality and poverty, reduces tax revenue, increases child and infant mortality rates, distorts the fundamental role of the government (on enforcement of contracts and protection of property rights), and undermines the legitimacy of government and of the market economy.

There are two opposing approaches in the literature on corruption, regarding the impact of corruption: efficiency enhancing and efficiency reducing. Advocates of the efficiency-enhancing approach, like Left (1964), Huntington (1968), Friedrich (1972), and Nye (1967) argue that corruption greases the wheels of business and commerce and facilitates economic growth and investment. Thus, corruption increases efficiency in an economy.

Advocates of the efficiency-reducing approach, like McMullan (1961), Krueger (1974), Myrdal (1968), Shleifer and Vishny (1998), Tanzi and Davoodi (1997), and Mauro (1995) claim that corruption slows down the wheels of business and commerce. Consequently, it hinders economic growth and distorts the allocation of resources. As a result, it has a damaging impact on efficiency.

In recent years, especially after 1995, there have been numerous empirical studies about the impact of corruption. A summary of these empirical studies is reported in Table 1.

Viewing corruption as an illegal tax, Vinod (1999: 601) estimates that a corrupt act worth $1 imposes a $1.67 burden on the economy. Mauro (1996), Ades and Di Tella (1997), and Tanzi and Davoodi (1997) find a negative relationship between investments and corruption. Mauro (1996), Leite and Weideman (1999), Tanzi and Davoodi (2000), and Abed and Davoodi (2000) find a negative association between real per capita GDP growth and corruption. Mo (2001) investigates the relationship between corruption and economic growth (GDP growth). His empirical analysis reveals that a 1 percent increase in the corruption level reduces the growth by about 0.72 percent. Examining the impact of corruption on foreign direct investment (FDI), Wei (2000), Drabek and Payne (1999), and Habib and Zurawieki (2001) find that corruption is a deterrent factor for foreign investors. Al-Marhubi (2000) investigates the relationship between inflation and corruption and finds a positive relationship. Bahmani-Oskooee and Nasir (2002) analyze the impact of the corruption on real exchange rate. Their empirical study covering 6.5 countries shows that countries with higher levels of corruption tend to have a real depreciation in their currency. Gupta, de Mello, and Sharan (2001) find a positive relationship between corruption and military expenditure. Gupta, Davoodi, and Alonso-Tenne (1998) find that high corruption increases income inequality and poverty by reducing economic growth. In brief, the foregoing empirical studies suggest that the economic costs of corruption are immense.

The purpose of this article is to investigate the impact of corruption on human development. Many authors have studied the effect of corruption on different macroeconomic variables, but only a few studies have investigated the relationship between corruption and human development conceptually and empirically. Qizilbash (2001) examines the corruption-human development relationship conceptually. Akhter (2004) investigates the nexus between corruption and human development empirically by using a full information maximum likelihood approach. He argues that higher economic globalization increases the level of economic freedom, which in turn improves human development. Higher economic globalization also reduces the level of corruption, which enhances the level of human development.

Theoretical Arguments

Corruption is mainly a governance issue and is widespread around the world. It exists in all countries, cultures, and religions to different extents. Although there is no agreement in the literature on how to define the phenomenon of corruption, it is generally defined as "'the abuse of public office for private gain" (World Bank 1997: 8):

Public office is abused for private gain when an official accepts, solicits, or extorts a bribe. It is 'also abused when private agents actively offer bribes to circumvent public policies and processes for competitive advantage and profit. Public office can also be abused for private benefit even if no bribery occurs, through patronage and nepotism, the theft of state assets, or the diversion of state revenues. Human development is defined as "expanding the choices people have to lead lives that they value" (Human Development Report 2001: 9). Expanding choices can be achieved only by creation of human capabilities that can be increased through development of human resources--for example, good health and nutrition, education, and skill training. As measured by the Human Development Index (HDI) published by the United Nations Development Program, human development contains three vital aspects of socioeconomic development: health, education, and standard of living. The HDI is based on three indicators, all of which are given equal weight (Human Development Report 2001: 240):

* Longevity, as measured by the life expectancy (at birth) index;

* Educational attainment, as measured by an index evaluating a combination of adult literacy (two-thirds weight) and the combined gross primary, secondary, and tertiary enrolment ratio (one-third weight);

* Standard of living and access to resources, as measured by an index calculating real GDP per capita in terms of purchasing power parity (PPP).

Does corruption affect the human development? If so, how? Do less corrupt countries tend to have a higher level of human development than more corrupt countries? There are a number of reasons why human development may be affected by corruption. As the literature review indicates, corruption can indirectly affect human development by lowering economic growth and incentives to invest. Different empirical studies show that corruption influences the resources spent on education and health. Mauro (1998) finds that corruption reduces government...